Solidly Anchored - Kirloskar Pneumatic Company

There are very few companies that are able to swim against the tide and not only manage a gloomy phase but post good growth. Thus it makes sense to look out for such scrips and invest in those as they are likely to give better returns over a long term period. One such scrip is that of Kirloskar Pneumatic Company (KPCL), which not only has performed well but has shown all the signs of good growth prospects. Besides, with the company available at fair valuations it makes sense to buy it at its CMP of Rs 366.

Based in Pune, the company primarily deals with the manufacturing of compressors and transmission products. Nearly 81 per cent of its revenues come from the compressor segment, while the rest comes from the transmission product segment. Apart from compressors, KPCL also undertakes designing and packaging of conventional and high-tech refrigeration systems, while it also manufactures gas compression systems for CNG stations and refineries. In the transmission products segment, the company manufactures gear boxes for rail traction, wind turbines, marine and industrial applications. Though KPCL’s products find applications across almost all the major industries, it is focused more on such sectors as oil & gas, construction and mining, power, railways and the Indian Navy. It is this clear focus that has helped the company post quite good numbers in FY09. It should also be noted that these are core sectors and come what may the government will not reduce its investment in these sectors, thus making them more or less recession-proof. Besides, the recent budget has also laid out various allocations towards infrastructure, power, railways and defence and these will generate good growth opportunities for KPCL to grow in FY10 as well. Secondly, what makes this company more attractive is that it has not been affected by the economic volatility of recent times. Its topline and bottomline grew 27 per cent to Rs 564.92 crore (Rs 445.28 crore) and 37 per cent to Rs 40.85 crore (Rs 29.83 crore) in FY09. In fact, this has been due to the performance of the compressor segment whose revenues grew by 32 per cent followed by the transmission segment’s growth of 15 per cent. All this has helped KPCL to grow every single quarter in FY09 on a sequential basis and that too in both topline and bottomline.[PAGE BREAK]

The other significant factor about KPCL is that the margins have grown consistently. While other companies across the board are trying to maintain their margins, KPCL’s operating margins have expanded by 325 basis points in FY09, which could be attributed to factors such as improved realisations and cost management initiatives of the company. That apart, though the management was not available for comment, according to Market sources, the company has good orders in hand both in the compressor as well as transmission segments.

Finally, though the scrip has recovered from its previous lows we believe that the valuations still look fair for KPCL. At FY09 EPS of Rs 31.81, KPCL generates a PE of just 11x, which is low when compared to Atlas Copco and Ingersoll-Rand (India), which are available at 16x and 13.4x. Though on an EV/EBIDTA basis KPCL is available at 6.7x, we feel it is quite fair for a briskly growing company such as KPCL. Also, with a dividend of Rs 10 per share (however, the scrip is quoting ex-dividend), the dividend yield comes to around 2.76 per cent, which is high and limits any further downside for the scrip, thus making it worth investing in for a long term.